NORTHEAST SNAPSHOT, JUNE 2008

Pittsburgh Office Market

McCombs

We are in a “recession” or “a recession is around the corner” or, from those people who do not quite understand some of the differences between a residential market and a commercial market “things must be tough due to the sub-prime mess.” 

These are statements that I have heard many times over the last few months. Judging by these statements and questions you would think the sky is falling regarding our regions office market. 

The sky is definitely not falling

In fact, there is a steady stream of activity taking place in each submarket within the greater Pittsburgh area.  Possibly for the first time in many years, each submarket is experiencing reasonably strong leasing activity and lower vacancy rates.  We are not without a few small exceptions to this statement, but overall there are a number of examples which illustrate the health and vitality of the office market in Western Pennsylvania.  They include:

When Westinghouse first announced its plans to locate their new headquarters facility in Cranberry Township, plans called for a 775,000-square-foot campus. The firm broke ground last quarter on its new home and have already expanded their need to more than 915,000 square feet, an additional 140,000 square feet of office space. Westinghouse has the option to expand further on the additional acreage it has purchased for the campus. With the amount of new contracts and upcoming projects the company is working on, further expansion is not out of the question.

But before the firm even moves into its new home, Westinghouse will be taking 92,000 square feet in the newest building in the Cranberry Woods Business Park — Building IV. The company’s Monroeville offices were near capacity by the end of 2007, so approximately 500 employees took temporary space in April. Westinghouse had also already leased 63,000 square feet of light industrial space at Cranberry Business Park earlier this year.

 Chicago based-Esmark Steel, which recently acquired Wheeling-Pittsburgh Steel, leased 36,000 square feet at Waterfront Corporate Park, Building 2. Esmark actually outbid another publicly traded company to secure this space.

Commerce Court – Forest City purchased the property from the lender with a 33 percent vacancy factor and within 6 months landed a 57,000-square-foot tenant and a 36,000-square-foot tenant -— Cardholders Service and Alcatel — and voila’ the building will soon boast a single digit vacancy rate

New construction has begun on Bridgeside Pointe II, a 160,000-square-foot  office and lab building within the Pittsburgh Technology Center near the campus of CMU and Pitt. This transaction is a result of the low single digit vacancy rate in the nearby Oakland submarket

Dick’s Sporting Goods announced their desire and need to expand its headquarters.  The company’s preliminary plans, which include building a 1 million-square-foot office campus, have been approved by Findlay Township supervisors.  The first phase of construction will include a 610,000-square-foot office building, plus a 60,000-square-foot aircraft terminal.  The 116-acre site will provide Dick’s with enough space to accommodate its growth for the next 20 years and could grow to 2 million square feet if needed.  The new building will house up to 4,000 employees.  In the mean time, Dick’s has leased 45,000 square feet of office space in the ONS Building in the RIDC Park West.

Construction has started on the newest mixed-use development to grace the city’s skyline. Three PNC Plaza will be 23 stories and will consist of 320,000 square feet of office space, 185 hotel rooms and 30 luxury condos. Reed Smith, LP will occupy a majority of the office space — 200,000 square feet — and PNC will take the balance.  Fairmont Hotel will be operating the hotel portion of the building. The projected cost is expected be roughly $179 million

In each of these examples rental rates paid or forecasted are 10 percent to 15 percent higher than those rates for similar space just 12 to 24 months ago. 

There are a few soft spots to note.  Various mortgage companies have or will soon “give back space” or place space on the market for sublease.  Also, the leasing activity which continues to be evident in the Central Business District (CBD) has resulted in a drop in the overall vacancy rate from 19.9 percent in the first quarter of 2007 to 16 percent in the fourth quarter of 2007.  However, with the exception of the UPMC headquarters move into US Steel Tower — 500,000 square feet taking its vacancy rate from 20 percent to 5.5 percent — most of the gains have been incremental.

Meaning, companies are moving from building to building and taking small percentages of additional space. Buildings in the CBD are still trading, for the most part, at well below replacement costs.  The beneficial result of these seemingly contradictory lines is that many class A and B buildings are receiving some badly needed upgrades in order to land or retain the larger high profile tenants active in the market place.

It is an interesting time. Activity remains solid.  There are still deals to be found by tenants and investors, yet landlords are happier today than they were 24 months.

— Randy McCombs is the managing director of GVA Oxford in Pittsburgh.

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